Friday, July 31, 2009

A Triangle In Ford

On 7/8/09 F completed wave e of a textbook 4th wave triangle at 5.24 3 ticks above the wave c low of 5.21. The standard measure rule for running triangles allows for the upper trendline to extend above the wave 3 high as shown. The measured target was then 7.31. F hit that target on 7/29, but the 5th wave did not look complete so I decided to give it another couple of days. The range expansion today probably marks the end of the run and provided a good place to take profits for a gain of 26% in 10 days. Frankly, I was surprised at today's move in F and counted it as an unexpected gift, not to be refused. Other approaches project F to as high as 9.30, but I am not willing to take that chance on a 5th wave at the current juncture in the market.

The wild swings continue in the Dollar, gold, and oil. I will stick to my current position respective to these moves as there is ample evidence that the Dollar is approaching an important low despite today's action. Looking only at price in gold, the directional odds are 50/50 as far as I can tell at this point, and when that is the case there is no benefit in switching sides until the odds change. Overall, the pattern for the bearish case would not be negated even if gold advances to the 975 area which is now a possibility. The seasonal pattern for gold is calling for a sharp spike into Monday followed by a decline for the rest of August. Also, the JJC is now close to resistance at the trendline drawn above the April/June highs. On balance, it seems more likely that the Dollar will turn up as the market turns down and that gold and oil will follow suit.

The Qs have closed at the low for two days in a row. I think the odds definitely favor the expected correction. All in all, I plan to just manage positions for the next couple of weeks.

Have a good weekend.

Thursday, July 30, 2009

5th Wave Complete

The case is fairly strong that the indexes completed 5 waves up from the July 8 low today. Note the clear divergence in volume between the wave 3 high and today's high. Also, note the poor close. It is no coincidence that the Nasdaq markets hit psychological round numbers at the highs today: Nasdaq Comp - 2000, Nasdaq 100 QQQQ - 40. Both Gann and Livermore talked about the importance of these round numbers as resistance and support in their writings.

So, where do we go from here? If this is the beginning of a correction of the rally from the July 8 low, I am looking for a bottom around August 14+/-. The correction would most likely test the June highs. The 50% retracement for the Qs is only 1 tick above the June high and an obvious target. The measured move target for the Qs from that level would be around the July 08 low of 43.30, which would be a phenomenal recovery. In fact, if my thesis regarding the rest of this rally is correct, it makes it easy to see how the Qs could better the 2007 highs by June of 2010, but we have a lot of work to do before then.

Today I exited positions in the UWM and USD and will look to re-enter on the pullback. I held my position in the UYG as the action in GE helped support it.

I am holding my long stock positions through this correction as it may prove to be more shallow than expected. Pullbacks are part of the trend and the big gains are had by riding them out.

Even so, I was disappointed by the poor close on MA today. I had gone long from 187.50 on the cup and handle breakout. It looks like it will be in the red before moving higher. I think it will move higher as V has moved up in 5 waves from July 8, and they should move together.

Oil gained back most of its losses from the prior day, so the bullish scenario is back on the table. Meanwhile, gold did not follow. If oil blasts higher from here I may let it go, but if there is a proper pivot off of today's high, I will look to go long.

In my opinion, this is no time to be thinking short. In fact, this is probably the worst time one could try to go short, except for intraday traders. There is little downside to support and a lot of potential upside. That is not to say that there aren't some stocks that are beginning to show intermediate term short setups, but it would be better to wait until the next wave of the rally is underway to see how they will behave.

Wednesday, July 29, 2009

Dollar Up, Gold Down, Oil Down

The Dollar continued to move up today and triggered a positive divergence MACD buy signal. Gold and oil both fell sharply. The move down in oil is close to negating any near term bullish potential, so it is beginning to look like the downtrends in gold and oil are accelerating.

I would like to see gold close under $900 to feel better about the intermediate term bearish prospects. Based on my reading of trading sites, most are still looking for a continued decline in the Dollar and a breakout in gold above $1,000. Dollar bulls as measured by DSI fell to 5% on Monday which is the lowest level of bullishness in 2 years.

I think we will have some strong evidence pretty soon how these 3 markets are going to play out.

The stock indexes look set to thrust higher into August 1, but I would be cautious about adding to long positions from this point forward until we see a pullback. The RSI14 and most Stochastics are maxed out except Stoch 5,5,1 and RSI5,1 which are falling (a negative divergence), which is both intermediate term bullish and near term bearish.

Tuesday, July 28, 2009

Dollar Up, Gold Down

The US Dollar index went below its wave 3 of C low by one tick today, possibly marking the low of the decline. Gold, meanwhile, fell $17.70. It will be interesting to see if oil diverges from gold for a time as I speculated or if it follows gold lower. If gold undercuts the July low by mid August and the Dollar continues to rally, I will remain short gold. I will withhold judgement on oil for awhile.

Monday, July 27, 2009

Clear Pattern In The Utility Average

The Dow Utility Average gets little press, but the elliott wave pattern is pretty clear, at least down to the March low. The decline from the Jan 08 high occurred in a very clear 5 waves and the swing highs and lows were coincident with the broader market turning points. In general, we would expect that the countertrend rally would retrace 50% to 62% of the prior decline. This turns out to be very close to the zone of the 4th wave of lesser degree, the 4th wave in intermediate wave 3 down, which is often the area that retracements terminate. The DJ15 Utility Average may be a good coincident indicator for the broader averages.

Saturday, July 25, 2009

Oil Headed Higher

I recently attempted to short oil by going long the DTO. This now appears to be a losing trade for several reasons: 1) oil is moving almost in lock step with the stock market which is moving higher, 2) oil has moved up in 5 waves from its July low, 3) oil service stocks have moved up in a very clear pattern of 5 waves from the July low, 4) the elliott wave pattern in oil is now more clearly showing a potential 5th wave after having completed a zig zag which alternated in form from the 2nd wave flat in March and April, and 5) an analysis of gold in accordance with methods described by Tom McClellan in his book on liquidity waves now projects a high in oil in late September.

So, that being the case, I will be looking to exit the DTO trade on a pullback if I am not stopped out first. I will then look to go long the DXO with a view of exiting half the position at the median line and trailing a stop on the second half. I will also be looking to take a stock trade on an oil service stock if there is a clear setup. The initial stop on the DXO trade will be just below the July low.

Friday, July 24, 2009

Broadening Top?

Just after the head and shoulders top that recently failed, the latest pattern in vogue is the broadening top formation. To be clear, it should not be called a broadening top. It should just be called a broadening formation. It is just as often a continuation pattern as it is a reversal pattern. From a purist point of view, this is not even a valid broadening formation as the lower line has only two touch points. To become bearish, we would need to see a move all the way down to the lower line, followed by a partial rise and then a breakdown.

The current phenomenon is a manifestation of the persistent bearish sentiment in the market. Notice how few people have mentioned the breakout from the inverted head and shoulders bottom pattern in the SP500 (Carl Swenlin is an exception). I calculate an average target of 1164 for the breakout from this pattern.

This rally so far is developing almost exactly as I had envisioned toward the end of 2008. And the degree of persistent bearishness is such that I think it is entirely possible that by mid 2010 the Nasdaq 100 will exceed its 2007 highs, and the SP500 may come close to retesting its 2007 highs. This does not reduce or negate my long term view that the bear market low will be seen in the time zone of 2012 to 2014 with the Dow approaching the 3000 level or lower.

So how is it possible that we are in a bear market with markets heading toward their previous highs? I believe the explanation is that we are in the largest X wave in the history of the stock market. This X wave is the connection between the first phase of the bear market which evolved as a flat in the SP500 and the second phase of the bear market which will most likely be a 3 wave decline. Once the first leg of that 3 wave decline is complete, we will be able to more accurately project the price and time of the final bottom.

As far as I know, I am the only person to put forth this hypothesis publicly. It occurred to me back in 2007 as wave C of the flat correction got underway. It has grown on me because it is about the only pattern that unifies the various cycles that I have previously described while maintaining the possibility of a potentially devastating outcome. The positive side is that we could also see only a retest of the 2009 low, which while perhaps disappointing to some bears would be a blessing to our nation and the world. I plan to post a paper on this analysis in the coming weeks.

The one thing that could prove this hypothesis wrong is a 5 wave decline from the top of the current rally that carries below the 2009 low.

Thursday, July 23, 2009

USD Ready To Rally?

There is an almost constant drumbeat of analysts and commentators who are calling for the collapse of the Dollar ( and by extension, a huge increase in the value of gold ). However, if the above chart labelling is correct, the Dollar may have completed a large flat correction which will lead to the largest rally since 2008. While ideally, the Dollar index would fall below the wave 3 of C and A lows, it is not an absolute requirement. The current 5th wave may be a truncated 5th wave.

Currently, the % of Dollar bulls as measured by the Daily Sentiment Index is less 7%. Such low levels of bullishness are often associated with significant bottoms.

A turn here in the Dollar would likely mean gold and oil are ready for a fall. As far as the stock market is concerned the correlation is less certain. At this point, I do not think a Dollar rally would derail the market, but we will have to wait and see.

It will take a sustained move back above the 80 level and a breakout above the trendline to confirm the bottom is in.

The Qs Hit Trendline Resistance

The NYSE closed above the resistance shown in yesterday's post, and today the Qs closed right on trendline resistance. The above trendline is parallel to the median line which also passes through the May and June highs. A lower parallel trendline approximately equidistant from the median line passes through the July low.

Their appears to be 3 different possible support levels: the median line, the June high, and the lower trendline. Based on the current cycles it looks like a possible date for a bottom would be around 8/13 to 8/14 assuming a correction actually occurs. So far, anyone looking for a pullback has been denied, but it appears we may now have a catalyst as AMZN, JNPR and MSFT are getting hammered afterhours.

The best case scenario in my opinion is a shallow correction that lasts one to two weeks. However, the timing would seem to indicate a 3 week correction.

I will not be selling this correction, but continuing to manage positions and looking to add at support levels.

Wednesday, July 22, 2009

NYSE At Resistance

While most stocks are behaving positively after earnings announcements, some key markets are approaching definite resistance levels: Dow Industrials, Dow Transports, SP500 and Wilshire 5000. The above chart shows the NYSE composite which is approaching both its rally high and median line resistance. While a significant selloff is unlikely at this point, a pullback to key moving averages and fib retracement levels would seem probable. It should be noted that the SP500 has yet to close above its June high, which speaks to the strength of the resistance and the likely outcome once it is broken.

Tuesday, July 21, 2009

Absolute Breadth Warning Of A Top

Coming back to the point that we are another critical juncture, the T2101 Absolute Breadth indicator is now at a level that as been associated with tops and bottoms in the past. Frequently when this indicator, which measure the absolute difference between advancing and declining issues, moves above 60 a top or bottom may be forming. As we are currently in a rally, the possibility of a top is the concern. In March of 2007, there was a surge to mark the top, a pullback in the indicator, and then another surge to mark the bottom of that correction.

This is why I am taking it slow adding to index positions.

"Uncle" They Said

We are now at a unique juncture. The SP500 hit its June high today and closed just below it, and afterhours, stocks such as SBUX and AAPL are moving higher with the Qs approaching 39.00. There are most likely a large number of stops on short positions sitting just above today's high and the 956 level will either reject the market once again or we may see an explosive short covering move higher.

We can count 5 waves up from the July low, but this is the weakest area of usefulness with Elliott wave theory. Look back over the last 10 years at all of the rallies that lasted at least 3 months and you will see that you can count five waves up at the beginning of each of them, and for several, the market just kept going and going and going with no real pullback. We may be at one of those points now.

Even looking at the March 9 to May 6 rally in the Qs, they only pulled back to the 12ema+/- until the top. If we move and close above 956 tomorrow in the SP500, I will be looking to add to index positions on pullbacks to the 12ema, because it is beginning to appear that is all the market is going to give us.

Mark Hulbet On The Golden Cross

Today's column by Mark Hulbert on CBS Marketwatch is a perfect example of why people do not understand trend following methods. I have alot of respect for Mr. Hulbert. He has provided a truly valuable service to the subscribers of his newsletter, the Hulbert Financial Digest, which tracks the performance of over 300 trading advisory services. The last time I received a copy of it over 4 years ago, it opened my eyes to the enormous lack of integrity in some aspects of this business. At that time, to the best of my recollection, less than 10% of the services that he tracked actually made money for their subscribers on a 10 year basis. It may have been less than 5%. Anyway, the numbers were atrocious. Of course, some of those services complained that he did not track their trades properly, but that is a red herring. If he wasn't, then their subscribers probably weren't either. That knowledge inspired me to really dig deeper into what it would take to become a successful trader, and for that I am grateful.

Unfortunately, in some of his columns, Mr. Hulbert shows that he doesn't understand the statistics behind trading either. Today, he posted some statistics on the golden cross. I am sure he was using the simple moving averages and not the exponential moving averages, but I don't think it would have changed his numbers much. His analysis demonstrated that the Dow rose about 1.53% 3 months after a golden cross on average versus an average 3 month rolling gain of 1.59% for the Dow. Well, duh. That is exactly what I would expect. They are the same.

The real question is how many investors or traders actually realized that 1.59% rolling gain. The purpose of using the cross of moving averages for entering the market is to confirm to the investor or trader that the market is in fact going up (or down) so that they can realize or exceed that average again. The cross of the moving averages by itself does not constitute a trading system. It lacks the requisite risk management, trade management, and entry and exit methods required for a complete trading system.

If Mr. Hulbert were to revise his calculations to include a stop loss and trailing stop, I am pretty sure he would find that the numbers would be quite different.

Monday, July 20, 2009

Another Look At The JJC

In June we looked at the wave count of the JJC so I wanted to follow-up to see if we could gain any insights as the JJC has been a good coincident and sometimes leading indicator for the stock market.

By my reckoning the JJC has just completed wave (c) of B of a flat correction that should lead to a retest of the June low. The wave count for a flat correction is 3-3-5, which is why wave C down is shown in 5 waves. The alternate count shows that the wave (B) or (2) correction completed July 8, and wave 1 of (C) or (3) is nearly complete. In that case wave 2 should follow soon. In either case, we should expect a near term pullback to correct the recent impulse move off of the July 8 low in the stock market.

The interesting correlation is not only with the stock market but with gold. Gold has now either completed wave ii up of wave 3 of (C) down or the bearish case may be in jeopardy. The seasonal cycle calls for another low in August followed by a sharp move up into late September or early October. If the bearish case is correct, then gold must make a new low in August in my view or something else is going on, something more bullish I think. If gold does not make a lower low in August, preferably below 900, then the most obvious solution is that it is forming a B wave of a large (B) wave of a very large and still ongoing flat correction. The reason I say that is the current pattern in gold is beginning to look very much like a triangle, and an upside breakout would almost certainly mean a (B) wave is in play. That doesn't mean that gold can't go to 1400 or higher because it certainly could in a (B) wave, but it is way to soon to be able to make that call.

The bottom line is that the pattern in the JJC and gold is leading me to stand pat with my short gold position until I see what happens in August, barring being stopped out of course. If gold does not close decisively below 900, then I will exit the DZZ and look to go long.

The JJC, gold, oil and stocks should all be near at least a short term top, or we will soon see one heck of a breakout.

Sunday, July 19, 2009

Another View - SP500 At Resistance

I wanted to offer another view that shows the SP500 sandwiched between the short term and intermediate term median lines. I think this may prove to be enough resistance that we will see a short term pullback. I doubt the pullback will last long, and once the market makes it above both median lines, there will be little to hold it back.

Saturday, July 18, 2009

A Short Trade In GME

The short trade in GME seemed to be a rather obvious setup. After a long labored rally from the November 21 low, GME rallied in 3 waves to the top of its upper parallel trendline and the 200dema where it reversed. About the same time my younger children started buying used games at Gamestop, which they informed me were much cheaper and that of alot of their friends were doing it now too - translation: lower earnings.

After the reversal, GME broke down below the steep upward sloping trendline and formed a sell pivot. I went short a half position just below the pivot. Another pivot formed at the lower trendline, but at that point it was just before GME's scheduled earnings announcement so I decided to hold on adding to the position.

The earnings and guidance disappointed as expected and GME gapped down, and then rallied back to the trendline. Since the gap down completed a 5 wave decline, I decided it would be best to wait for the completion of an upward correction and a new sell pivot. However, the rally to the trendline was it, and the sell pivot formed at a lower level. Being so far from my initial entry I cut back on the position size on the second entry.

On July 14, a MACD positive divergence buy signal was generated and GME closed above it downsloping trendline, which also happened to be one day after the first big move up in the markets off of the July 8 low. Therefore, even though my target below 18.00 was not hit, it was time to cover.

GME has now completed a perfect 3 wave abc, zigzag, decline from its April high, so we can expect that a rally back up toward and perhaps above the April highs is underway. I certainly have no intention of going long this stock, but it may be a future short candidate.

Overall I captured 32% of the move, which is fair, for a profit of 15.9% and less than my goal of 30%, but I am not complaining. I think this conservative approach repeated in a disciplined manner will yield consistent profits for patient traders. The time in the trade of 50 trading days works out to about 80% annualized.

Friday, July 17, 2009

A Note On Some Important Numbers

Over the last few weeks I have noted that the Qs have been respecting the level 35.50, which could seen by how the highs or lows of important days were exactly at or close to 35.50 as the Qs ranged above and below.

I calculated the annual pivots for the Qs for 2008, and guess what, 35.42 is the central pivot. A little off, but close enough for me. Now that the Qs are back above that level decisively, it looks like clear sailing for a while. From this point forward all pullbacks should respect that level or the rally could be in jeopardy.

The current quarterly pivot for the Qs is 34.47. The July low is 34.30 so far. Q-R1 = 39.14 and Q-R2 = 41.91, so there is room to the upside. At the same time, the current M-R1 = 37.48, which is where we are now, so a pullback to the M-P = 36.13 would seem the likely next move.

Correction from prior post: 37.57 is the 1.618 extension of the January range, which was exactly today's high. So again, there is some resistance in this area.

On the other hand, 35.30 is the 1.0 extension of the January range, which provides additional support together with the annual pivot.

To summarize, there is definite support from 35.30 to 36.13 in the Qs while there is also resistance at the current level. A pullback to the support zone is likely, but should be a great place to add to or initiate new positions.

Nearing A Pullback

Markets exploded higher this week and the Qs made new rally highs. At this point, it looks as though we will see small degree 4th and 5th waves to complete the move from the July 8 low in the Qs. This should be followed by a correction of 38% to 62% of the recent move, but I suspect it will go no lower than the 36 to 36.50 zone. 37.47 is a fib ext of the Jan range in the Qs so we may not see appreciable upside from here until after a pullback.

The most likely time period for the pullback to begin is July 21 to 23 which would be 30 days from the June solstice and the June low respectively.

I will be using any pullback to initiate new and add to existing index long positions.

Some of the stocks that I am following at the moment are:


(I have positions in a few of these names. Please do your own research.) I generally only consider stocks that appear to have the potential to gain at least 40% from a new trend or breakout signal. I will occasionally settle for 30% if the timing looks right.

Tomorrow I will share my recent short trade in GME.

Thursday, July 16, 2009

Qs Close Above Major Median Line

The Qs have closed back above the major median line confirming the trend is up. At least near term, I expect the green trendline to provide support, but once 5 waves up are complete a 50% to 62% retracement is likely that will carry the Qs below the major median line briefly once again.

If they are able to move back above it after the correction, then a strong move toward the upper trendline is not out of the question.

A point about the MACD. In general, Gerald Appel advocates selling only on the second signal after a buy signal (or using a slower MACD for selling such as 19,39,9). The only reason to sell would be if the MACD falls below its recent low after a sell signal.

Wednesday, July 15, 2009

Wave C Blast Off

Today was clear confirmation that the uptrend has resumed in full force. In retrospect, it should have been clear that the much heralded HS Top was too well followed to have been valid. The next one should be a doozy though as it will probably not be given any credence by the public who have now been burned. As it turned out the SP500 simply pullbacked in 3 waves to a shelf of support in the 870 to 880 zone.

Today it closed back above its major median line and almost dead on the minor median line. Once it moves back above the minor median line and resistance in the 944 to 956 zone the upper line of the minor pitchfork will be the probable target, which could be anywhere from 1000 to 1100.

Expect a pullback near term as wave i of C corrects, but from my perspective there is little doubt that the correction has fulfilled its purpose of increasing bearish sentiment. Although the $CPC and the $CPCE did not reach the usual levels associated with bottoms, other sentiment measures such as the Option Buyer's Sentiment Gauge at did reach a level seen at bottoms.

At this point there are 4 major upside targets for the Qs based on different methods: 1) 40.06, 2) 41.05/41.24/41.56, 3) 42.67, and 4) 43.60. I suspect that the first 2 of these are the most probable, although the others cannot be ruled out.

I will repeat several times that based on my cycle work, I do expect that there could be a major shakeout in August, but it should not be the end of the rally. What we may see is a double bottom with a higher low around mid-August, so don't get whipsawed on that basis alone.

Finally, I would like to re-iterate my view that the top that occurs this fall will not be the high of the bear market rally, which, I believe, based on my cycle work will come in 2010 after a late fall correction in 2009. As we get closer to the current rally top, I will provide more insight into my reasoning on this outcome.

Little Doubt Left

Yes, the rally is back on track. I think there is little doubt of that. A failed HS Top is a big bullish development that should propel the Qs to at least 40 and possibly higher. The financials also failed to follow-through on the downside, and my favorite financial stock, JPM, has broken above its downsloping trendline this morning (This is my favorite financial stock, not my favorite company. I have no love for the financial companies right now.)

This morning I have taken 1/2 positions in the UWM, USD and UYG. I will add QLD on a pullback if it occurs. I have covered all but 1 stock short position and have 1 outstanding stock short order. I will add to positions as conditions allow with the idea of holding to the rally peak in September/October with the expectation that there will be a shakeout in the next 4 weeks that will make the bulls think twice.

There are future shorts developing right now that you should keep on your radar. DELL is breaking down for one.

Gold may be heading back to 950 before its downtrend resumes in earnest.

What an exciting trading year this has been.

New T

Terry Laundry has posted a special short term update,, indicating that strengh today would confirm the new T that he had forecast in late June. This new T projects a high in September to early October I believe. He will provide and update this evening.

This seems to fit with the basic observations that have been posted here regarding the price action. Basically, any solid close today with a gain of 1.5% to 2% on higher volume will confirm the resumption of the uptrend.

Tuesday, July 14, 2009

Correction May Be Over

Today the Dow and the SP500 closed back above the neckline of the HS Top pattern. My first thought was that this was not a factor as the volume was so light, but the market reaction to INTC afterhours will likely change that. Unless there is a substantial change in the futures between now and tomorrow's open, I will be selling my positions in the QID and the TWM for a small overall loss, loss on the QID and flat on the TWM. As I indicated in recent posts, the market was at a critical juncture, and we needed to be ready to let go of the short bias in favor of a renewal of the uptrend. One of the key levels that I cited was a sustained move back above 35.50 in the Qs. If the Qs open higher tomorrow, then that will have occurred. The Dow and the SP500 still need to hurdle the 200dema, however, I suspect that will not be problem.

I will be looking to take initial positions in the USD and UWM. I will wait for a pullback to go long the QLD. If it doesn't happen then so be it.

It also looks like the financials are headed higher, so the UYG may be worth considering.

If the Qs close higher tomorrow, they will trigger a perfect MACD buy signal. The MACD has pulled back below the zero line and will cross above its signal line, while the 50dema of the Qs is sloping upward indicating a positive trend. The MACD sell signal came at 36.06, so the loss on that trade will be small, which is great.

I have repeatedly said since this rally began in March, that the risk was to the upside. While I had strongly believed that we would see another low in this correction, the lack of downside follow-through is pointing to the likelihood that the correction is over. In fact, IBD noted this morning that yesterday counted as another rally follow-through day. I have one criticism for myself and that is that I attempted to short too many individual stocks during this correction, and have realized only limited success, ie a few winners, but mostly losses.

One area that is clearly a problem for all trend following methods is the mechanism for dealing with flat markets and mild corrections, and once this rally is over I intend to spend some time looking back on how it could have been recognized and handled better.

Monday, July 13, 2009


American Dairy (ADY) got hammered today after it lowered its second half sales outlook. I had purchased a put option, July expiration, on GMCR expecting a similar outcome, but alas, GMCR has held up well and my put option is nearly worthless. I did make one very big mistake. I should have bought enough time so that the option would not expire until after GMCR reports earnings on July 29. It still may not go down, but at least there would have been the chance for a miss.
The markets finished well, and I think the action tomorrow will go a long way in telling us whether or not the correction is over or whether the HS Top is still in play.

Neckline Retest Complete?

Well we finally rallied back up to the neckline of the HS Top pattern in the SP500 and the Dow today. Intraday the pattern of the move looks like it may be complete or nearly so. We are now at a critical juncture. If the market follows-through tomorrow and closes back above the neckline with gains greater than 1.5% to 2%, we would need to consider that the HS Top was a failed pattern and be ready to add to and increase long positions. A website that I subscribe to issued a confirmed sell signal on Friday which are usually pretty accurate. I only found 3 in the last 9 years that did not result in at least some downside continuation after the signal. This may be one of those times, but this is when patience is rewarded. Let's wait for clear confirmation of an upside reversal before jumping back on board that train.

Sunday, July 12, 2009

Logical Vs Mathematical Markets

I occassionally take the opportunity to read articles at the Ludwig Von Mises Institute website. An article today titled "Mathematics Versus Economic Logic" may prove valuable for traders who desire a deeper understanding of market mechanisms. I must warn you that the scholarly style of the writing makes for sometimes difficult reading for those of us not schooled in the esoteric world of economic philosophy, but I think it is worth the effort.

Mises wrote, "Economics is not about goods and services; it is about the actions of living men. Its goal is not to dwell upon imaginary constructions such as equilibrium. These constructions are only tools of reasoning. The sole task of economics is analysis of the actions of men, is the analysis of processes."

I think, by extension, we could apply this statement to the study of financial markets. Our goal is not to dwell upon imaginary constructions such as moving averages of prices. These are only tools of reasoning we use in our analysis of market processes. While our explicit purpose is to profit from these market processes, our implicit purpose is understanding and analysing the actions of men behind these processes.

Mises goes on to say, "There is no such thing as quantitative economics."

Whether you agree with that statement or not, it has profound implications for the state of current affairs. To a large degree, the explosion of mortgage derivatives is based on the notion of quantitative economics, and we can see how well that worked out. In recent years, there has been an increase in the number of hedge funds using quantitative trading methods. At least these funds will have to prove their utility or go out of existence, but individual traders should be cautious about using such appraoches unless they have deep pockets.

Technical analysis of markets is not physics. To the extent that we understand the actions of market participants, we will be better traders.

Saturday, July 11, 2009

First Five Days Of The Month

The above chart shows the Qs with a box around the first five trading days of the last 5 months. The first five trading days of the month is a good guidepost for the trading action for the rest of the month.

The upward breakout on 3/11 established the new uptrend for this rally which continued in April with another breakout. In May there was a failed downward breakout which held above the high of first five days of April and established a trading range for May. In June the breakout above the first five days of May stalled, reversed and broke out to the downside below the low of the first five days of June and the high of the first five days of May. The first five days of July formed a lower high indicating that the rally has stalled out.

A downward breakout of the first five days of July below 34.30 would be the first indication that the correction is extending as expected. On the other hand, a sustained move back above 35.50, the May high and the low of the first five days of June would increase the likelihood that the correction is over.

A common target for breakouts of the first five days of the month is the 61.8% extension of the range. For July, the downside target would be 32.73. The 100% ext, less likely, would be 31.76. Both of these levels fall into the projected downside target zone for this correction as demonstrated in prior posts by other methods. I think this increases the likelihood that if these levels are hit in July that it will mark the end of the correction, and I will look to be a buyer at those levels. Failure to hit those levels followed by upside follow-through could also mark the end of the correction.

The projected levels for the Dow and the SP500 are:

SP500: 830.63, 806.72
Dow: 7782.34, 7593.91

Note that the lower of these levels holds above the prior 3 month low, which maintains the uptrend using Marketclub's triangle technology.

Friday, July 10, 2009

Are We Still In A Bear Market?

The Cabot Tides system uses 5 indexes to determine the intermediate trend of the market: MLO - Merrill Lynch Technology Index, NYSE Composite Index, Nasdaq Composite Index, S&P Smallcap 600 Index and the S&P 500 Index. When 3 of 5 are in an intermediate uptrend, then the trend of the market is up. When 3 of 5 are in an intermediate downtrend, then the trend of the market is down.

But what about the long term trend? A very good way to determine the long term trend is to look at the 6 and 12 month emas of a market or index. When the 6mema is above the 12mema, the long term trend is up. For stock indexes, there are few whipsaws. This basic method would have produced positive returns even in the volatile 1970s.

Applying this analysis to the above 5 indexes, we see that the 6mema is less than the 12mema for all 5 indexes. In other words, we have been in a very good intermediate term rally within a still ongoing bear market no matter how you look at it.

However, before you go and try to trade this as a system, I must warn you that the way this rally is shaping up I do expect a whipsaw later this year with these moving averages. If you do use them, wait for confirmation, and the second positive signal is likely to be better than the first.

Neckline Restest?

A retest of the broken head and shoulders top neckline and perhaps the 50dema in the SP500 seems probable, but it certainly isn't required. The equivalent move in the Qs would be to around 35.50, the May high and the 25dema.

I was happy today to see some of my recent analysis confirmed by other market technicians. Steve Hochberg in the Elliott Wave International Short Term Update identified 845 to 850 as probable downside targets in the SP500 confirming my calculations by other means, and Carl Swenlin of Decisionpoint noted in his weekly chart analysis that gold has broken down and he expects gold to correct to below 700. Mr. Swenlin indicated that it may take the rest of the year for gold to get there. I do disagree with him on that point, but that is a small matter.

Next Friday is options expiration, so there may a somewhat bullish bias to the first part of the week.

One reason that I believe, quite strongly, that the current correction is a B or X wave that will be followed by higher prices is that so many stocks are developing nice basing patterns and remain in uptrends, or are in fact breaking out. This past week AMGN broke out, VOLC made a new 3 month high, FDO is trying to break back above its downsloping trendline, and many more. This is why I am also selectively buying stocks even as I hold the QID and TWM. I did sell ORCL this week as it broke below the trendline from the March low and basically did not follow-through after its otherwise better than expected earnings report in June. (I see now that GS has just upgraded the software sector after hours tonight. Interesting.)

One thing that we would want to see to confirm a completion of the correction is for volatility to breakout above the June high. It is not required, but it would demonstrate some return of fear.

Oil looks like it has reached a point of near term exhaustion. It may be a good time to take profits in the DTO. I originally was going to add to the position on pullbacks but it ran away from me. I think I will lock in a quick 25% gain rather than risk a new uptrend in oil even though my target has not been met. Oil may rally strongly as the dollar appears ready to break down in a 5th wave. The completion of that 5th wave in the dollar may be a good re-entry point for the DTO. We need to wait and see how oil behaves on any rally.

Thursday, July 9, 2009

CVX Follow-up

As soon as I finished the last post stating that the chart pattern in CVX looks pretty bearish, I see a news flash that CVX is warning of sharply lower refining margins.

The charts often do tell the whole story even when we don't know why.

"Dow Higher On Positive AA News" - Huh?

Yes, this headline can across the screen during my late lunch hour this afternoon when the Dow was barely holding the flatline and Alcoa had been selling off all day from its early morning high. To add to the absurdity of the statement, only this morning the talking heads were saying how little influence AA has on the Dow since its price is low and the Dow is a price-weighted index. Later in the day, the comment was made that the Dow is now meaningless.

I don't think so. The Dow may become meaningless sometime day but only when it is much, much lower than it is now. That said, some very bearish looking charts have developed in some, not all mind you, but some of the most expensive names in the Dow 30, e.g. CVX, XOM, BA, WMT and VZ. When these break down in earnest, we will know the fall selling season is upon us.

GS Hype

Goldman Sachs is getting hyped in the financial media just days before its scheduled earnings announcement. Perhaps I am wrong, but this seems like a ploy to dupe the investing public to bid up the stock while professionals may be looking to dump it on the announcement. I hate to be so cynical, but it seems too obvious.

The new target that I heard given this morning is simply the 61.8% retracement of the 2007/8 decline at around 175. Are banks and brokerage firms simply using basic technical analysis now instead of fundamental analysis after so many of them fired their technical analysts? That could be really dangerous indeed.

My take is that GS trades sideways to down instead of up, possibly down to 120 to 125. If it can hold that level, it may make another attempt on the upside, but who knows, maybe it really is as simple as drawing fib levels and buying upgrades.

Short Squeeze Signal In Oil

The above chart shows a view of light sweet crude in Telechart with 20 day, 1.5SD Bollinger bands and 20 day Keltner channels. On 7/7/09 a short squeeze signal triggered ( not to be confused with a short covering squeeze ) when the Bollinger bands moved from a sharply contracted state inside the Keltner channels to an expanded state outside the Keltner channels accompanied by a downside breakout.
Not only was there a downside breakout, but oil confirmed a double top and simultaneously broke an upsloping trendline from February and broke below the low of the high month - 3 signals in one. Upside resistance is now the June low. The primary downside target is the equidistant projected parallel trendline and then the Jan high thereafter.
On June 30 I suggested the DTO might be worth considering as oil was forming a double top. I took a part position in the DTO on July 1 as the low of June 30 was broken in oil. I am looking to add to that position on any retracement in oil back to the 64 to 65 area. I don't think we should see oil back above 66.50+- and I have raised my stop on DTO to 74.30, just below breakeven on this trade.
If one were trading futures on the 30min or hourly time frame, now would be the time to take at least partial profits for sure. However, I am looking for oil to reach the lower targets and am willing to hold through an upward correction. The DTO could reach 110 to 125. I will take partial profits when oil hits 55 and trail a stop on my remaining position. Oil could fall lower as we have seen in gold. A retest of the Feb lows is not out of the question.
The typical seasonal pattern would call for a low in oil near the end of July. If the 50 to 55 area holds, then that may be correct. However, I am not sure the seasonal pattern is in force. I will be looking for signs of an inversion, meaning that we may see lower prices ahead until November.
Above all, the action in the price of oil trumps all other considerations, and now the trend in the price is down.

Wednesday, July 8, 2009

Correction Targets Still Ahead

It looks like we are setting up for a near term bounce to the underside of the HS Top neckline. In the SP500 the upside is around 895 to 900 if it makes it to the 50dema. This should be a b wave with wave c of Y to follow to complete the correction next week. A sharp break of today's low ahead of that time frame would indicate a deeper correction is unfolding. NYSE lows remain very few, so there is little indication at the moment that the bear market is ready to return in earnest.

This HS Top must be one of the most watched in recent history. I wouldn't be surprised if my barber mentions at my next hair cut. Usually when a pattern is that telegraphed it does not play out to its full potential, but we will have to wait and see.

The NYSE and SP500 also added another distribution day, but I doubt that IBD will call the market in correction until we see more downside.

Gold Continues Decline

Gold has broken down again as expected (see 7/6/09 blog post). The next stop is the 200dema around the psychological 900 area. I suspect we will see a bounce from that level that will take gold back up to its 50dema, but that level should hold as upside resistance and should coincide with a 5th wave bottom in the dollar. That should be the last gasp of any upside attempts. Once gold rolls over from the next bounce, I expect it will drop precipitously below the 800 level on its way to the October 08 lows.

Tuesday, July 7, 2009

Monthly Sell Signal In The Qs

The Qs closed solidly below the low of the high month, June, on higher volume confirming the intermediate trend is down per the Monthly, Weekly, Daily System. The MACD was already on a Sell, and the Cabot Tides system may go to a Sell-Neutral status in one or two more days. We should expect that the support zone between the Jan/Feb highs and the May low will hold the decline, but a strong break below the lower trendline of the Andrew's Pitchfork may indicate that the bear market has returned in earnest.
I am still expecting that we will see another rally to complete the move off of the March low; however, the form of this correction will tell us whether that is the correct view. For now, I am holding short with the QID, TWM, DZZ, DTO and misc stock short positions. I am looking to add a position in the SKF, but not expecting a big move there.
I have been looking at the new wave of turn dates into August. If the support zone above does hold and we see a confirmed bottom in July, it appears that we may see another sharp pullback in August. This may be either a retest of the July low or a second or b wave pullback. Either way, for those who chose to go long after this correction, be prepared for a shake-out.
Recently I mentioned that AMGN may be getting ready to break out in a 3rd of a 3rd wave. After hours today, AMGN is up almost 14% on positive news about a drug trial confirming the 3rd of a 3rd hypothesis. I am holding this position for a minimum target of new all-time highs above 86.92. On the monthly chart AMGN appears to have completed a running flat correction at the April 08 low, which is a decidedly bullish pattern with targets projecting to the 130 to 170 range. The June lows are critical to this viewpoint and they should not be violated.

Monday, July 6, 2009

The Path Of Least Resistance In Gold Is Down

The prospects for gold over the next few months do not look good. When the dollar dropped sharply in March, gold managed only a meager rally. The dollar dropped even more precipitously in May, and gold made a lower high. Now, the dollar looks ready to finish up some sort of 4th wave correction, possibly a triangle, and gold has made little upside progress. When the dollar finishes wave (5) down to complete a large flat correction, gold may manage a bounce back to the 950 to 960 level, but it should be short lived.
Once the dollar finishes the flat correction, a significant rally should ensue that may last several months which should drive gold down to 700 or below.
I am maintaining my short gold position in the DZZ until I see strong evidence that contradicts the above analysis.
The stock indexes today likely completed wave A of Y of a double zigzag correction. We should see a bounce lasting another day or two followed by wave C down to complete the correction. We would change this expectation should the indexes break below the lower parallel trendline of the correction channel (I'll show it if it happens.)

HS Top Sell Signals In Dow and SP500

This morning we have the seen the HS Top sell signals that everyone has been expecting for the last two weeks. However, the next probable move is a rally back to the 50dema or a little higher in both indexes. This may be only an intraday move, but the last 3 days counts as 5 waves down on the intraday chart. We should expect a small countertrend move before the next wave down.

The entire correction may be a double zigzag. If so, the next wave down will complete the correction to the surprise of the bears. It will take a move below 8090 in the Dow and 870 in the SP500 near term to alter this outcome.

Friday, July 3, 2009

CMG Triangle

The above chart shows a possible 4th wave triangle in CMG in development with waves d and e to go to complete the triangle. CMG has been a leading stock in this rally with its bear market low in November.
We can draw several conclusions from the above chart: 1) the correction in the broader markets will likely take more time, enough time for the triangle above to complete (2 weeks?), 2) the current correction in the broader markets is not likely to be severe and may be completed soon, and 3) after the correction is over, leading stocks will likely make new highs.
I would not make the above statements based on CMG alone, but after scanning through about 400 stocks this week, I have seen a plethora of triangles. I have seen this happen before. Triangles start showing up in abundance before the last move of a rally, usually. I will be trading these triangles. The reward/risk ratio is good and the probability of hitting the target is high. Once the triangle comes to completion, I will revisit the setup and target.
As a side note, when a clearly triangular shaped formation of several weeks duration is being formed on the chart, and the stock breaks out above the wave b high before waves d and e complete, it can be extraordinarily bullish. Please look at WYNN in November 2006. What at first appeared to be a triangle turned out to be waves 1 and 2, and WYNN gained 55% from its wave b breakout high. I missed that trade waiting for waves d and e which never came. I have seen this type of behavior since, so it is worth noting.

Thursday, July 2, 2009

Correction Resumes But Bottom May Be Closer Than Many Think

The correction resumed in earnest today and even though volume was light there is little doubt that the market was under distribution whether IBD counts it as such or not. The Dow is only 22 points away from triggering an HS Top sell signal, and the SP500 is not far behind. However, as much stock as technicians put in this pattern, we may not be as far away from a bottom as many think.

First of all, just because a pattern triggers doesn't mean that the fully measured target will be realized. At Thomas Bulkowski has categorized 98 chart patterns and the statistical results relating to them. The % of trades meeting the HS Top target is only 55%. Bulkowski recommends using a target based on the % meeting the target times the pattern height, which means, in this case that many traders are over-estimating the downside target for this pattern. I come up with a target of 850. (I erroneously stated it as 840 earlier today.) The 38.2% RT is 845, so we are only about 50 points away in the SP500.

The above chart shows the equity only put/call ratio. We are now beginning to approach levels seen at market bottoms and we haven't even confirmed a top yet. However, I suspect that what we may see is a spike in the CPCE once (if) the HS Top pattern is triggered, followed by a rally to the underside of the 50dema, followed by another decline with a lower spike in the CPCE to form a positive divergence. Ideally we would like to see the 5,200,1 PPO go above and then back below 28% to confirm the bottom. We may only be 8 trading days away from a potential bottom.

Once the HS Top is triggered sentiment is likely to swing to the bearish side quite quickly. This will provide support for the next rally.

What's Next

We've had some pretty weak action in the broad markets over the last few days. Volume has been anemic showing little demand for stocks. Resistance levels could not be taken out. We had a narrow range bar on 6/26. Breakouts from narrow range bars will often show range expansion. When the breakout fails without range expansion, oftentimes the range expansion will occur in the opposite direction. Based on the futures this morning after the jobs report, it certainly looks like we will see downside range expansion.

If the SP500 falls through the 50dema, around 900 on the cash index, I expect an initial move down to the 875 area followed by a rally back to the 50dema lasting 1 to 4 days. After that rally is complete, the SP500 should move down to the 840 to 845 area to complete the correction. 840 is my HS Top target, and 845 is the 38.2% retracement from the March low.

If that zone of support does not hold, then the next levels of support are 775 to 800. I am not sure at the moment what the pattern will look like if that happens. It depends alot on how long its takes to get there. We will just have to see how it all unfolds. As Adam Hewison has pointed out in his recent videos on the SP500, as long as it remains above the 783.32 level, the 3 month trend will be up. The 790 to 810 area could be a low risk buying opportunity. Likewise, for the Qs, a move to the 30 to 32 area could be a buying opportunity as well with a stop below the 3 month low of 29.79.

Unless we see a major reversal to close higher today, it looks like a break below the 50dema and the HS Top neckline is imminent.

Wednesday, July 1, 2009

Market Close Up But Near The Lows

Today's action could hardly be called convincing for the bulls as the markets sold off all afternoon while finishing up on very light volume. It seems all eyes are on tomorrow morning.

Though not readily apparent, the selloff in the Qs can be counted as an unfinished impulse wave. If so, we could expect more selling tomorrow morning followed by an afternoon retracement rally to make everyone feel good for the weekend.

Right now I would say the bears have the upper hand, and once we are past next Monday and Tuesday, the bullish seasonal bias is behind us. We should finally be able to come to some sort of conclusion about market direction after tomorrow.

Seasonal Bias Prevails

Markets are up today, July 1, which is to be expected around 80% of the time. The question is: does this mark a resumption of the uptrend? And the answer is mixed. It is clear that for the Qs 36.50 is the demarcation line. This morning the Qs gapped up, corrected to exactly 36.50 and are now headed toward the June high, but the pattern itself is not impulsive, leading me to believe that we are in another flat correction or a triangle. This is definitely bullish, but also implies that the June low may be retested before the uptrend resumes in earnest. It will take a move on volume below 36.05 to confirm that wave c down is underway. Staying above 36.05 would be quite bullish.

The Dow, on the other hand, is clearly rising from its recent low in a zigzag(abc) or a double zigzag, which also means the June lows will be retested. However, the upside of this correction that has now extended could be 8665 or higher. Once 8394 is taken out, we will know that wave c down is underway.

So what should traders be doing right now? Preparing. The market is in a trading range, a neutral market condition. As such, you should be preparing for a breakout in either direction. While we have been speculating that the breakout would be to the downside, the fact is it could go either way. Perhaps you are in cash, if so, that is probably the best place to be until there is more evidence. Another approach is to be mixed in long and short positions. If the market advances, you may be stopped out of short positions and you can add to long positions. If the market falls, you may be stopped out of long positions and you can add to short positions.

The main thing is to have a plan and stick to it. You are not going to win all of the time, but don't let this trading range environment churn up all of your profits.